BANGALORE: While startups designing wearable devices grab the headlines, venture capital investors are plumbing for the backroom boys - those building the underlying software that allows such devices to function.

So far about half a dozen startups in India have built devices such as wristbands, rings and shoes that come under the banner internet of things (IoT), where machines communicate with each other. But they have had to turn to crowd-funding platforms or specialist angels for money to fuel new ideas.

"There is still a lot of uncertainty regarding the types of IoT (internet of things) device that could work. We favour a more flexible, platform-focused approach that can be molded as the space evolves," said Sameer Singh, an analyst at BitChemy Ventures, a Hyderabad-based VC firm that recently invested about 15 crore in a Bangalore-based company Altiux. The 10-month-old company has built a platform for applications in home automation and smart metering.

"Device makers find it difficult to sustain margins over the long-term," said Singh.

Venture capitalists are keener to back startups developing technology platforms on which other applications can be built. For example in the mobile space, Google's Android is a platform on which hundreds of apps are developed every day.

"It was not easy convincing the investors, but they saw potential in the product," said Shyam Vedantam, cofounder of Altiux. "The device makers will eventually be at the mercy of original equipment manufacturers and will have challenges in scaling up. That's why venture investors prefer platform players (like us)," said the 38-year-old who earlier worked with General Electric.

Another firm Altizon, a Pune-based platform maker, said it is evaluating term-sheets from several venture capitalists that are keen to back the firm. The year-old company raised seed money of 84 lakh last June.

The company, cofounded by Vinay Nathan, Ranjit Nair and Yogesh Kulkarni, has designed a software and hardware platform that can listen in on conversations between machines, aggregate data and perform analytics in real time. Altizon, whose name is derived from mashing up Altitude and Horizon, is focusing on the retail and manufacturing sector and is likely to close a round of funding within June.

"We hope to have a million connected devices on the platform in the next three years," said Nathan. The 36-year-old, who graduated in computer science from the University of Southern California, is of the view that global acquisitions around the world have boosted the confidence of investors looking to back such startups.

Last December, Nasdaq-listed technology company PTC acquired ThingWorx, a software platform designed to build and run the applications of the connected world for $112 million (Rs 675 crore). A month later, Google acquired smart thermostat maker Nest for $3.2 billion (Rs 19,300 crore).

According to a report, the providers of IoT platforms will eventually earn the biggest share of the total IoT revenues while device makers represent only 5-10% of the overall share. This is due to strong competition amongst device makers, according to the University of Jyvaskyla in Finland, which released an IoT Report in 2013. In India, the absence of a strong manufacturing network and poor design aesthetics is also keeping venture investors away from funding device makers.

"Even if I want to invest in device makers, I have not found any worthy of investing in," said Mohan Kumar, executive director of Norwest Venture Partners India. The global $1.2-billion fund has previously invested in wearable technology companies such as Misfit Wearables and Fitbit in the United States. "Conceptualising a product, having a good user interface, and good ergonomics, these are essential for devices. And that that does not happen in India," he said.

Software, seen as the strong point for Indian technology firms, is what investors are willing to back.

ConnectM, a company which has built applications such as telecom tower monitoring, bank branch and ATM monitoring as well as smart metering has received funding from IDG Ventures and technology company Sasken.

"There are always software layers on top of devices — graphical, analytical, GUI, in terms of the parameters it can track. We would be interested in that," said Parag Dhol of Inventus Capital Partners, who is looking for such companies to invest in. While angel network Mumbai Angels said it is also looking to invest in two companies focused on manufacturing and services respectively in the IoT space.

Experts are of the view that such investments mark the first phase of growth in the Indian IoT space. "A lot of startups are going to come up, many are going to fail, and some will succeed. The successes will define where the industry is headed," said S Sadagopan, founder-director of the International Institute of Information Technology, Bangalore.

Industry lobby group IoTBlr is talking to investors to gauge the interest for the space in India.

"Currently, from the look of things, it looks Indian startups are going to be software provider in this area," said Nihal Kashinath, founder of the network. "We are trying to change that."